Grand Central: Have Data Been ‘Broadly Consistent’ With Fed’s Forecast?

The Federal Reserve’s debate today about reducing its $85 billion-per-month bond-buying program could boil down to two simple words uttered by Fed Chairman Ben Bernanke in his June press conference: “Broadly consistent.”

If incoming data were “broadly consistent” with the Fed’s forecast of “continuing gains in labor markets,” in addition to “moderate growth that picks up over the next several quarters” and “inflation moving toward our 2 percent objective over time,” Mr. Bernanke said it would be appropriate to scale down the bond purchases later in the year.

Payroll employment has picked up lately and the jobless rate keeps falling. Check. Growth held up in the second half of 2013 and appears to be on a better track for 2014 with fiscal headwinds receding. Check. But inflation is a muddle and is hard to check off the list. In October it was up just 0.7% from a year earlier using the Fed’s preferred measure. Still, many officials are likely to stick to their forecast that it will pick up in 2014.

The Fed, in short, has cleared some of the hurdles it set out, but not clearly all of them. Mr. Bernanke tried to give himself and his colleagues wiggle room when he used the “broadly consistent” standard in June. The question he’ll need to answer today is whether to use that wiggle room to take some small first step toward reducing purchases. Don’t be surprised if he does.

MORNING MINUTES

It’s a big day for Fed Heads and we have a full package of treats!

Bernanke’s Mixed Legacy. After a financial crisis he didn’t see coming, Ben Bernanke steered the U.S. away from a potentially devastating panic. Yet five years later, the recovery he engineered with extraordinary policies remains frustratingly weak. That legacy—a mix of failings, boldness and frustration—is coming into sharper focus, and with it a clearer picture of the power and limitations of modern central banking. http://on.wsj.com/19RrVVd

Canada’s Poloz Not Worried About Taper. Bank of Canada Gov. Stephen Poloz tells the WSJ in an interview if the Fed tapers, it would reflect a stronger U.S. economy, which bodes well for his country. http://on.wsj.com/19QXJcR

Global Inflation Slowing. Across developed economies, slowing inflation is posing a dilemma for the Federal Reserve and other major central banks. Should they respond with even easier monetary policy or dismiss it as a temporary development? http://on.wsj.com/19QDgoG

Bank of England Unanimous. Minutes from its December meeting show all nine members supported decision to keep policy steady. The Monetary Policy Committee Wednesday said any further “substantial” appreciation of sterling could slow the U.K.’s economic recovery. http://on.wsj.com/19S8f3y

ECB vice president Vitor Constancio is no fan of the preliminary deal reached by euro zone finance ministers for a new bank resolution body that doesn’t include common taxpayer funds. Mr. Constancio said Wednesday the bank resolution fund needs a stronger financial backstop. The back-and-forth between the ECB and finance ministers over the resolution authority will likely be a key theme into 2014.

Bank of Japan’s Kuroda Ends 2013 Facing Heavy Dose of Skepticism. Ten economists surveyed by the Wall Street Journal all said the central bank will have to step up its monetary stimulus sometime next year. The bank is expected to hold policy steady at its meeting Thursday and Friday. http://on.wsj.com/18Qp4vr

Reserve Bank of Australia Says Rate Cuts Still on the Table. Australia’s central bank said interest rates may be cut again next year as the local currency remains “uncomfortably high,” hindering a shift away from mining-dependent growth.http://on.wsj.com/1bOrTAF

A new study from the London-based National Institute of Economic and Social Research finds little evidence for the theory that technological changes have led to a “hollowing out” of middle class jobs, at lease not in the U.K.http://www.voxeu.org/article/hollowing-out-labour-market-new-evidence

Some good news on the economy, for Germany at least. The Ifo business sentiment index climbed slightly in December while the country’s finance agency said Germany will issue less debt in 2014 than it did this year. Europe’s biggest economy is expected to balance its budget in 2014, highlighting the divergence between Germany and its struggling neighbors such as France and Italy that are struggling to cut their deficits amid stagnant or shrinking economies. http://online.wsj.com/news/articles/SB10001424052702304866904579265662104607996

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